Service Contract Act Price Adjustment and SCA COMPLIANCE PRINCIPLES (DOL briefing follows)

Service Contract Act (SCA) Kyle Roberts Air Force East Region Labor Advisors Office SAF/AQCA Dept of Labor Prevailing Wage Conference Washington, DC 5 October 2011 Service Contract Act Price Adjustment and SCA COMPLIANCE PRINCIPLES (DOL briefing follows)

Overview • Agency Labor Advisors • Contract Price Adjustment Resources (Air Force) • Contract Price Adjustment due to the Service Contract Act (SCA) • SCA Price Adjustment Elements • SCA Price Adjustment Sample • Questions

Agency Labor Advisors

Overview • Agency Labor Advisors • Price Adjustment Resources (Air Force) • SCA Price Adjustment • SCA Price Adjustment Elements • SCA Price Adjustment Sample • Questions

Price Adjustment Resources http://ww3.safaq.hq.af.mil/contracting/ • AF Labor Advisor Public Website Note: Other agencies have similar Guides. Check with your Agency Labor Advisor

SCA Price Adjustment • What is the Federal Acquisition Regulation (FAR) contractual authority for allowing a Service Contract Act (SCA) labor price adjustment? • FAR 52.222-43, Fair Labor Standards Act and Service Contract Act -- Price Adjustment (Multiple Year and Option Contracts) (Nov 2006) • (a) This clause applies to both contracts subject to area prevailing wage determinations and contracts subject to collective bargaining agreements. • (b) The Contractor warrants that the prices in this contract do not include any allowance for any contingency to cover increased costs for which adjustment is provided under this clause…. • FAR 52.222-43 provides the authority to adjust the contract price for SCA-covered labor; this clause can only be included in firm-fixed price contracts or labor-hour contracts Note: highlighting used throughout this briefing is provided for emphasis and does not appear in the actual FAR text

SCA Price Adjustment (cont’d) • FAR 52.222-43 (cont’d) • (d) The contract price or contract unit price labor rates will be adjusted to reflect the Contractor’s actual increase or decrease in applicable wages and fringe benefits to the extent that the increase is made to comply with or the decrease is voluntarily made by the Contractor as a result of: • (1) The Department of Labor wage determination applicable on the anniversary date of the multiple year contract, or at the beginning of the renewal option period. • Contractor must provide actual payroll data • Contracting Officer calculates the difference between the amount paid by the Contractor and the new Wage Determination (WD) • The period covered by the adjustment begins with the date the new WD is required by the terms of the contract – not the date of the WD

SCA Price Adjustment (cont’d) • Triggered by incorporation of a new wage determination IAW FAR 22.1007 (c) • Annual anniversary date/option exercise (for contracts using annual appropriations) • Biennial anniversary date if term exceeds 2 years (and not funded or subject to annual appropriations) • A new wage determination is generally only incorporated into a contract at these times • Just because a new wage determination is available on WDOL.gov does NOT automatically mean it should be incorporated

SCA Price Adjustment (cont’d) • FAR 52.222-43(d)(1) (cont’d) • For example, the prior year wage determination required a minimum wage rate of $4.00 per hour. The Contractor chose to pay $4.10. The new wage determination increases the minimum rate to $4.50 per hour. Even if the Contractor voluntarily increases the rate to $4.75 per hour, the allowable price adjustment is $.40 per hour • If the Contractor chooses to pay more than the WD rates, the adjustment is based on what the Contractor ACTUALLY paid--NOT on the previous WD rates Previous WD hourly rate: $4.00/hr Contractor actual: $4.10/hr New WD hourly rate: $4.50/hr Adjustment: $.40/hr (4.50/hr - $4.10/hr)

SCA Price Adjustment (cont’d) • What is allowed in the SCA labor price adjustment under FAR 52.222-43? • (e) Any adjustment will be limited to increases or decreases in wages and fringe benefits…, and the accompanying increases or decreases in social security and unemployment taxes and workers’ compensation insurance, but shall not otherwise include any amount for general and administrative costs, overhead, or profit. • Certain tax increases must "accompany" (be caused by) the WD increase. The clause provides no relief from tax increases from other causes or tax increases on a Contractor's total payroll

SCA Price Adjustment (cont’d) • General calculation of price adjustment • New minimum wage and/or Health and Welfare (H&W) • Minus (-) actual wage/H&W paid in previous contract period • Plus (+) change in payroll taxes and workers comp • (on amount of increase, only) • Equals (=) the price adjustment • Remember: no overhead (OH), general and administrative (G&A) or profit allowed under the authority of FAR 52.222-43(e) • $15.00 (new wage) • 14.50 (previous wage paid) • .50 (wage increase) • + .08 (H&W increase) • + .12 (change in taxes) • $ .70/hr (price adjustment)

SCA Price Adjustment (cont’d) • Two Price Adjustment Methods • Forward Pricing Method • Contractor claims an adjustment based on the projected impact of a new or revised WD • The projection uses the employee hours in the prior contract period factoring in any known or expected changes to contract scope or work force • Actual Cost Method • If the claim has been delayed until after the adjustment period is over, by either an approved extension to the 30-day requirement for filing or by delay in contract modification, the Contractor should use actual employee hours worked as the basis for the claim • Most SCA labor price adjustments are done using the Forward Pricing Method

Price Adjustment Elements • Adjustment of wages • Contractor provides actual wage rate information paid in the previous contract performance period • Contracting Officer calculates the difference to the new WD rate from the actual rate previously paid by the Contractor (not necessarily the same as the minimum rate required by the previous WD) FAR 52.222-43(d)(1) specifically states that the Government’s adjustment will be based on what the Contractor actually paid (provided it was at least the previous WD’s minimum)

Price Adjustment Elements (cont’d) • Adjustment of Health & Welfare (H&W) • Contractor may be required to provide data supporting the actual premiums paid in previous period • If the H&W increase is paid directly to employees, it is considered taxable wages. The Contractor will incur an accompanying expense in FICA, WCIand possibly FUTA and SUTA • If H&W is paid to a third-party provider, Contractor incurs no increase in payroll taxes so no FICA or WCI adjustment is due on the H&W increase FICA and WCI adjustment are due on the H&W amount when H&W is paid directly to the employees. No FICA or WCI adjustment is due on H&W amount if itis paid into an insurance plan.

Price Adjustment Elements (cont’d) • Adjustment of Vacation • A vacation adjustment is only appropriate if the revised WD changed the vacation benefit or entitlement criteria (if, for instance, the old WD stated “one week paid vacation after 1 year of service” and the new WD states “two weeks paid vacation after 1 year of service”) • No adjustment is permitted merely because an individual employee's seniority has increased his/her entitlement • Vacation hours required by the WD may be included in the claim (applying the hourly wage and H&W increase to the vacation hours) Typical hours/year: Productive Hrs: 1,920 Vacation: 80 Holidays: 80 Vacation required by the WD is found in the notes following the WD classifications (or in the CBA)

Price Adjustment Elements (cont’d) • Adjustment of Holidays • When the revised WD increases the number of required holidays, the Contractor may generally claim an adjustment for the increased cost • The adjustment is the SCA minimum wage rate times the number of increased holiday hours (generally, eight hours per each new holiday for a full-time employee) • Holiday hours required by the WD may be included in the claim (applying the per hour wage and H&W increase to the holiday hours) The total number of holidays required by the WD is found in the notes following the WD classifications (or in the CBA)

Price Adjustment Elements (cont’d) • Adjustment of Unemployment Taxes • The Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) payments are normally not affected by a WD revision • Unemployment taxes are paid by Contractors on wages up to a specific annual ceiling or cap • The current FUTA rate is only paid on wages up to a cap of $7,000; Contractors should have included this in their initial offers • SUTA caps vary by state, but most states use caps under $20,000. Rates vary by state and by employer. • SUTA websites can be reached through http://www.americanpayroll.org/members/stateui

Price Adjustment Elements (cont’d) • Adjustment of Unemployment Taxes (cont’d) • Since annual employee wages usually exceed the caps in most states without regard to the revised WD, typically no additional FUTA or SUTA is required-- the Contractor is already paying the maximum tax • The contract price is not adjusted for changes in the FUTA or SUTA rate; if an adjustment is warranted, the current rates apply • Contracting Officer verifies the applicable SUTA rate by requesting suitable documentation from the Contractor or contacting the relevant state employment tax office • If an adjustment is due, it is only for the FUTA/SUTA percent rate times the wage rate differential

Price Adjustment Elements (cont’d) • No adjustment is allowed on General and Administrative (G&A) costs, overhead and profit • These elements are specifically excluded by FAR 52.222-43(e) and are not allowable as part of an SCA price adjustment • Increases in general liability insurance, state gross receipts taxes and bonding costs are also not allowable as part of an SCA adjustment (despite such costs being calculated based on total wages or total revenue)

Price Adjustment Elements (cont’d) • No adjustment is allowed for employee reimbursements • Employee expenses reimbursed by the Contractor, such as payment for fuel, mileage, meals, lodging, tool and uniform allowances and safety shoes, boots or gear, are not considered when calculating the hourly wage rate paid • Such payments are considered as reimbursement of a Contractor’s business expenses and not wages or fringe benefits • These items must be excluded from any calculation for price adjustment under FAR 52.222-43

SCA Price Adjustment Sample Our SCA Labor Price Adjustment situation : 1. Custodial and grounds maintenance services, fixed price, ABC Clean is the Contractor; location: Grissom ARB, IN 2. The wdol.gov wage determination* for the next option has been incorporated into the contract; it requires wage increases for the classifications used by the Contractor 3. The H&W rate also increases from $3.50 to $3.59/ hour. The wage determination specifies the ‘employee-by-employee” method of compliance ** therefore, the $3.59 is due on all hours compensated up to a maximum of 40 hours per week *If contract has a CBA WD, use rates found in the current CBA; methodology for doing the price adjustment is the same—just have to verify cost data with CBA rates and benefits (e.g., sick leave, vacation accrual, etc.) ** Currently there are two H&W methods for each location. The alternate WD requires an average cost of $3.59/hr based on all hours worked by SCA-covered employees.

SCA Price Adjustment Sample (cont’d) 4. Per FAR clause 52.222-43, the Contractor makes a claim for the increased cost. 5. ABC Clean provides information which includes (1) each employee’s work hours, paid vacation and holiday hours, (2) a “Defense Contract Audit Agency (DCAA) approved” overhead tax rate of 11.65%, (3) the cost of new T-shirts for the employees (the contract required Contractor-identifiable clothing) and (4) employee vehicle mileage reimbursement. The Contractor provided no payroll records. 6. The Contractor claims the increase for the (1) janitors, (2) lead janitor, (3) grounds maintenance laborers, (4) tractor operator, (5) pest controller, (6) payroll clerk, and (7) the project manager. The lead janitor wage rate is not listed on the wage determination and the procedure (“conformance”) to establish the minimum SCA wage rate was not completed

SCA Price Adjustment Sample (cont’d) • Step-by-step, what does the Government do to evaluate this claim? • What increased costs are required of (forced on) the Contractor to comply with the revised SCA wage determination? • What accompanying costs are permitted by 52.222-43? • Step 1: Eliminate unallowable costs: • Non-SCA employees: Payroll Clerk and Project Manager • Non-wage/benefit costs: T-shirts, mileage • 11.65% “DCAA-approved” tax rate ??

SCA Price Adjustment Sample (cont’d) • Payroll information needed to calculate the SCA labor price adjustment from the previous year to the current year should be provided by the Contractor • The authority to require this information is provided under FAR 52.222-43(g): • “(g) The Contracting Officer or an authorized representative shall have access to and the right to examine any directly pertinent books, documents, papers and records of the Contractor until the expiration of 3 years after final payment under the contract.” • Step 2: What additional information is needed to evaluate? • Payroll records showing actual wages and H&W • Actual hours worked/paid • How was H&W paid? • What is the current workers comp rate? • Were any employee wages previously less than the FUTA and/or SUTA caps? • Any other documents needed by the CO to verify the claim

SCA Price Adjustment Sample (cont’d) Step 3: Calculate: ** The Lead Janitor classification was not legally established through a “conformance” (see FAR 52.222-41(c)), therefore, no adjustment is due. The Lead Janitor is being paid above the minimum requirement for Janitor so there will be no adjustment to the wages (see FAR 52.222.43(d)).

SCA Price Adjustment Sample (cont’d) • As a reminder, it is the Contractor’s responsibility to conform a position to the WD (FAR 52.222-41(c) Compensation) • (2)(i) If a wage determination is attached to this contract, the Contractor shall classify any class of service employee which is not listed therein and which is to be employed under the contract (i.e., the work to be performed is not performed by any classification listed in the wage determination) so as to provide a reasonable relationship (i.e., appropriate level of skill comparison) between such unlisted classifications and the classifications listed in the wage determination… • Referred to as a “conformance” • Accomplished via SF 1444 • Requires Contractor to conform wage determination within 30 days after the unlisted class of employee performs any contract work • Contractor submits completed SF1444 (including employee agreementor disagreement) to the Contracting Officer • Contracting Officer submits SF1444 to the DOL • DOL approves/disapproves and returns to the Contracting Officer who forwards to the Contractor

SCA Price Adjustment Sample (cont’d) Step 4: Was health and welfare paid in cash to the employees or paid to a third-party provider? If cash: calculate accompanying costs on H&W total If third-party provider: do not calculate accompanying costs of the H&W total • FOR THIS EXERCISE: • The contractor documents that H&W was paid to a third-party provider • So, no accompanying costs are due on the H&W increase

SCA Price Adjustment Sample (cont’d) ** Although the lead janitor wage rate was not conformed, it is an SCA-covered position, due the minimum H&W.

SCA Price Adjustment Sample (cont’d) • Step 5: Calculate accompanying costs: • FICA (6.20% for Social Security + 1.45% for Medicare, 7.65% Total) • Workers Compensation Insurance (Contractor rate = $4 per $100 (4%)) • Federal Unemployment Tax Allowance (FUTA) (if applicable) • State Unemployment Tax Allowance (SUTA) (if applicable) *FICA and WCI are not applied to H&W since H&W is paid to an insurance plan and not in cash

SCA Price Adjustment Sample (cont’d) Total SCA labor price adjustment due for the upcoming contract performance period: $26,360.57

Questions

SCA Compliance Principles

SCA Compliance Principles • Payment of wages and fringe benefits • Bona fide Fringe Benefit Plans • Health & Welfare Fringe Benefits • Paid Vacation Fringe Benefits • Paid Holiday Fringe Benefits • Equivalent Fringe Benefits • Temporary & Part-time employment

Payment of Wages (29 C.F.R. § 4.165) • Wages established by wage determination, otherwise FLSA minimum wage • Calculated on fixed and regularly recurring workweek of 7 consecutive 24-hour workday periods • Payroll records kept on this basis • Bi-weekly or semi-monthly pay periods if advance notice

Payment of Fringe Benefits • Cash payments in lieu of fringe benefits (FBs) must be paid on regular pay date (29 C.F.R. § 4.165(a)) • Payments into bona fide FB plans must be made no less often than quarterly (29 C.F.R. § 4.175(d)) • FB costs may not be credited toward wage requirements (29 C.F.R. § 4.167)

Discharging Minimum Wage & Fringe Benefit Obligations Under SCA, the contractor may not credit excess wage payment against the FB obligation: Wage Determination: Employee Paid: Wage $10.25 Wage $12.00 FB $ 3.59 FB $ 1.84 Total $13.84 Total $13.84

Computation of Hours Worked(29 C.F.R. §§ 4.178-4.179 & Part 785) • Determined under the FLSA pursuant to 29 C.F.R. Part 785 • Includes all periods in which employee is “suffered or permitted” to work • Hours work subject to SCA are those performed on covered contracts • Must keep affirmative proof of time spent on covered and non-covered work in a workweek

Wage Payments for Work Subject to Different Rates • Employee must be paid - • Highest rate for all hours worked, unless • Employer’s payroll records or other affirmative proof show periods spent in each class of work • Applies when employee works part of workweek on SCA-covered and non-SCA-covered work

Bona Fide Fringe Benefits(29 C.F.R. § 4.171(a)) • Constitute a legally enforceable obligation that • Is communicated in writing to employees • Provides payment of benefits to employees • Contains a definite formula for determining amount of contribution and benefits provided • Is paid irrevocably to an independent trustee or third person pursuant to a fund, trust, or plan • Meets criteria set forth by IRS and ERISA

Fringe Benefits Plans(29 C.F.R. § 4.171(a)(2)) • Provide benefits to employees on account of: • Death • Disability • Advanced age • Retirement • Illness • Medical expenses • Hospitalization • Supplemental unemployment benefits

Health and Welfare (H&W)Fringe Benefits • Three types of FB requirements: • “Fixed cost” per employee benefits • “Average cost” benefits • Collectively bargained (CBA) benefits • Types and amounts of benefits and eligibility requirements are contractor’s prerogative

“Fixed Cost” Benefits (29 C.F.R. § 4.175(a)) • Increased to $3.59 per hour June 17, 2011 • Included in all “invitations for bids” opened, or • Other service contracts awarded on or after June 17, 2011 • Required to be paid “per employee” basis • For ALL HOURS PAID FOR up to 40 hours in a workweek, and 2,080 hours a year • Includes paid leave and holidays

“Fixed cost” H&W ContributionsBi-Weekly Payroll EmployeeHrs. paidFB’sCashTotal Libby 80 $180.00 107.20 287.20 Jean *100 $180.00 107.20 287.20 Ann 20 0.00 71.80 71.80 Tim 80 $287.20 0.00 287.20 Tom 60 $151.00 64.40 215.40 Total *340 $1,148.00 * FBs and cash payments may vary so long as total equals $3.59 per hour. 20 hours of overtime excluded.

“Average Cost” Benefits(29 C.F.R. § 4.175(b)) • Contributions may vary depending upon employee’s marital or employment status • Total contributions must average at least $3.59 per hour per employee: • Excludes paid leave time and holidays • For all “HOURS WORKED” • Compliance determined on a group basis, not an individual basis

“Average Cost” Benefit Contributions EmployeeHours WorkedContributions Libby 250 $650 Jean 150 $450 Ann 250 $650 Tim 50 0 Tom 100 $250 Total 800 $2000 $2000/800 = $2.50 average FB contributions

“Average Cost” Benefits Contributions EmployeeHoursShortfallTotal Libby 250 $1.09 $272.50 Jean 150 $1.09 $163.50 Ann 250 $1.09 $272.50 Tim 50 $1.09 $ 54.50 Tom 100 $1.09 $109.00 Total 800 $872.00 $2000 + $872 = $2872/800 hours = $3.59

H&W Footnotes(Determine Compliance) • Prevailing WDs provide H&W footnote • All occupations listed on WD receive benefits as specified • “Fixed cost” H&W footnote • Single line specifying hourly, weekly, and monthly contribution amounts • Specified on odd numbered WDs “$3.59 an hour or $143.60 a week or $622.27 a month”

Service Contract Act Price Adjustment and SCA COMPLIANCE PRINCIPLES (DOL briefing follows)